Final Salary / Defined Benefits Transfer Out

fallen121

I work for a company that has a number of so-called "final salary" schemes which are closed to new members. New staff have to join a defined contributions scheme and buy an annuity at the end of it. In point of fact, our pensions are no longer "final salary" by dint of the fact that a few years ago they were first capped so that as our salaries increased only a percentage of that increase was pensionable. And now the situation is that we will get whatever our percentage 80ths is of the salary we earned two years ago. Most of us now have or have maintained for a while additional AVCs. Hopefully I have explained that ok.

At our site we have a Pensions Club and various speakers are invited in. Recently a pensions adviser came in to talk to a number of the staff on a 1:2:1 basis and I have to say I am concerned by the level of excitement these interviews are generating. Basically, this guy wants to take on 100 clients and encourage them to transfer OUT of the defined benefits scheme into a scheme he runs. Apparently he has taken on 70 people already and only has room for 30 more and is seeing people at other companies too. This in itself makes me suspicious. It is like if we don't join now we will somehow miss out. In my view, anything that looks too good to be true probably is.

The basic package he is selling goes a bit like this. Say the pension you can expect is £23k. You will be taxed above whatever the personal allowance is after you retire, but assuming now you could take £10,300 and then would pay tax @25% on the rest. So actual take home would be roughly £19,800. Correct me if I am wrong because I haven't actually seen him. I think this assumes that you don't take 25% as a lump sum or maybe have a separate AVC or something. I am hearing this second hand, so please excuse if I have got this totally the wrong way up.

His idea is that you get a transfer value and for £23k he assumes that will be roughly 600k or thereabouts. The plan is then that you invest 150k in one scheme and draw down some of that each year as part of your 25% tax free lump sum allowance (think about £12,700 odd) from that fund (which presumably will then reduce each year) and then the remaining 450K is invested in various (unspecified) investments which are assumed to produce a return of around 4.5% each year and you take no more from this pot than your personal allowance. Thus giving you the same income of £23K but without ever having to pay tax.

Several things bother me about this. First of all, what if the investments DON'T produce the expected 4.5% return? What about charges? (no-one does this for free)? What happens if the Government remove the 25% tax free lump sum option? What protection do you have if the entire fund goes belly up and bankrupt and you are left with nothing? What if you have ten or more years left to retirement - you will lose the employers matching contributions each month.

NOT looking for advice because I personally wouldn't touch this with a bargepole. Just looking to see what people think. Are these so-called "tax avoidance" schemes common? And what is to prevent the government from moving the goalposts and changing any or all the assumptions made here?

Another thing that makes me suspicious is that apparently this guy is saying that "no-one knows what your employer will do with the current scheme they might close it". But the one I am in requires 75% of members to vote for closure and I can't see that happening anytime soon.

[Deleted User]

If it sounds too good to be true then it probably is ...

Although I am no expert, I wouldn't touch it with a bargepole either!

grey_gym_sock

it's usually best to stick with a DB pension, not to transfer out. and the other side of the coin is that it's in the employer's interests that people do transfer out, which is probably why they invite speakers like this one. it looks like they are trying to trick their employees into giving up a valuable benefit.

only wanting to take on 30 more clients sounds like nonsense, and pretending there is a limited supply is of course a well-known sales tactic.

the broad idea that you can get 25% out tax-free from a DC pension scheme is perfectly true. but it sounds like it is presented in a somewhat misleading way. for instance (though there are a few ways to do this), from a £600k pot, you can take £150k as the 25% tax-free, and invest that outside the pension, while keeping the other £450k invested inside; then you can draw an amount from the £450k each year, which is taxable, but no tax to pay if it's covered by the personal allowance (so say £11k); and you can spend as much as the £150k as you like each year, with no tax payable since that's already outside the pension (so say £12k); but if you're spending £12k from the £150k pot, and £11k from the £450k pot, then of course the £150k pot will run out first (after 13 years, if you assume - slightly pessimistically - that there's no growth); and then, if you want to keep spending £23k a year, you'll have to draw more from the £450k, paying tax on the part over the personal allowance (at 20%, incidentally, not 25%). in reality, this approach postpones paying tax, but however you do it, 25% of a DC pension pot is tax-free, the rest taxable, with the tax reduced by your personal allowance.

in terms of tax, how does 25% tax-free compare to staying in the DB pension? that depends on the DB scheme. some do have a tax-free lump sum, or a choice of lump sum versus higher pension. some allow you to take your AVCs as a 25% tax-free lump sum, while taking the DB part as on-going pension - which can be a very good option. so it depends on the exact details, but you may well be getting 25% tax-free by staying in DB, the same as you get by switching to DC.

even if, in your case, there is a slight tax advantage to DC, that may be outweighed by the value of the guaranteed benefits in the DB scheme. as you say, there is investment risk in DC - the return may not be 4.5%.

for a few people, it can be worth switching out of a DB scheme, but it depends on the transfer value offered, and their health (since if you won't live long, DB is less valuable), and on whether they have a spouse (since DB schemes often pay a pension to a surviving spouse). but i don't like the way this is being sold, so i wouldn't be asking this speaker for advice on whether to do that.

OldBeanz

If the scheme is as good as he says it is why would he restrict himself to 100 clients? He would hire another two IFA's give them each 150 clients and put his feet up, raking in the money and doing no work.

fallen121

Guys, I really do appreciate these comments. And Grey Gym Sock in particular. What you say makes a lot of sense. Our current scheme includes a very generous spouse pension and it doesn't sound as though what is being offered includes this or takes account of the costs of providing something equivalent to this.

Someone in my team is seriously considering this, and I am going to urge them to think very carefully about the investment risk, the situation regarding what happens when the lump sum runs out and the spouse pension situation, which I think seems to have been rather glossed over.

I think the best thing I can do is to recommend that they take independent financial advice and not consider switching ANYTHING until they have done so. And certainly not on the say-so of a so-called "adviser" who let's face it, is only really in the business of signing up clients and making money.

PensionTech

I would like to know whether this adviser is regulated. Can you find out his name or the company he represented?

crux

grey_gym_sock wrote: »

the return may not be 4.5%.

Indeed - what if the theoretical £600k pot becomes a £400k by time of retirement?

DC = you take the investment risk